Secondary Sources: Taxing Gasoline, The Risks Of High U.S. Debt, Financial Regulators

-Taxing Gasoline: Valerie Karplus makes the case for a higher tax on gasoline.“If our goal is to get Americans to drive less and use more fuel-efficient vehicles, and to reduce air pollution and the emission of greenhouse gases, gas prices need to be even higher. The current federal gasoline tax, 18.4 cents a gallon, has been essentially stable since 1993; in inflation-adjusted terms, it’s fallen by 40 percent since then,” the M.I.T. scientist writes. “It certainly wouldn’t make lives easier for struggling families. But the gasoline tax is a tool of energy and transportation policy, not social policy, like the minimum wage … the Obama administration chose a familiar and politically easier path: raising fuel-efficiency standards for cars and light trucks … Greater efficiency packs less of a psychological punch because consumers pay more only when they buy a new car … new standards will cost the economy on the whole — for the same reduction in gas use — at least six times more than a federal gas tax of roughly 45 cents per dollar of gasoline. That is because a gas tax provides immediate, direct incentives for drivers to reduce gasoline use, while the efficiency standards must squeeze the reduction out of new vehicles only. The new standards also encourage more driving, not less … A higher gas tax would help fix crumbling highways while also generating money that could help offset the impact on low- and middle-income families.”

-The Risks Of High US Debt: Michael Derby reports that several economists—David Greenlaw ofMorgan Stanley, James Hamilton of the University of California, San Diego, Peter Hooper ofDeutsche Bank, and former Fed governor Frederic Mishkin, now of Columbia University—arewarning in a new paper that the U.S. may face an economic and financial catastrophe if it doesn’t get government spending under control. “The researchers argue the government may soon reach a point where its borrowing levels will set in motion a vicious and destructive surge in financing costs that will get worse the more that gets borrowed. Collateral damage to this dynamic will be the Federal Reserve’s ability to provide support to the economy,” Derby writes. The economists base “their cautionary tale on a study of 20 countries over the past 12 years. They found ‘a significant relation between debt loads and borrowing costs, with a one-percentage-point increase in debt as a percent of gross domestic product being associated with a 4.5-basis-point increase in the yield on 10-year government bonds in a linear specification’ … They also find that borrowing costs can start to spiral out of control. ‘Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration,’ they write. The authors warn the Fed faces future trouble based in large part on the very possible surge in market based rates tied to a loss of confidence in the fiscal outlook. They reckon that by 2017 and 2018, the Fed will be losing ‘sizable’ amounts of money. ‘The combination of a massively expanded central bank balance sheet and an unsustainable public debt trajectory is a mix that has the potential to substantially reduce the flexibility of monetary policy’ to help the economy, the paper says.”

-Financial Regulators: Howard Davies questionsthe idea that the U.S.’s system of financial regulation needs a structural overhaul. “The American system looks remarkably similar to the one that turned a collective blind eye to the rise of fatal tensions in the early 2000’s. One factor that contributed to institutional stasis was the absence of a persuasive alternative. In the decade or so leading up to the meltdown of 2007-2008, the global trend was toward regulatory integration. Almost 40 countries had introduced single regulators, merging all types of oversight into a single all-powerful entity. The movement began in Scandinavia in the early 1990’s, but the most dramatic change came in 1997, when the United Kingdom introduced its Financial Services Authority (I was its first chairman). Other countries adopted slightly different models. A fashionable approach was known as “twin peaks,” whereby one regulator handled prudential regulation – setting capital requirements – while another oversaw adherence to business rules … These integrated structures seemed to offer many advantages. There were economies of scale and scope, and financial firms typically like the idea of a one-stop (or, at worst, a two-stop) shop. A single regulator might also be expected to develop a more coherent view of trends in the financial sector as a whole. Unfortunately, these benefits did not materialize, or at least not everywhere. It is hard to argue that the British system performed any more effectively than the American, so the single-regulator movement has suffered reputational damage … The truth is that it is hard to identify any correlation between regulatory structure and success in heading off or responding to the financial crisis. Among the single-regulator countries, Singapore and the Scandinavians were successful in dodging most of the fatal bullets, while the UK evidently was not … Does it matter whether the central bank is directly involved? Many central bankers maintain that the central bank is uniquely placed to deal with systemic risks, and that it is essential to carry out monetary and financial policies in the same institution. Again, it is hard to find strong empirical support for that argument … There is no consensus on the role of the central bank: in around a third of countries, it is the dominant player, in another third it has responsibilities for banks only, while in the remaining third it is a system overseer only. We could see this as a controlled experiment to try to identify a preferred model. After all, financial systems are not so different from one another, particularly in OECD countries. But there is no sign of a considered assessment being prepared, which might at least help countries to make better-informed choices, even if it did not conclude that one model was unambiguously best.”

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